Guidance

ESFA subcontracting standard

Updated 17 August 2022

Applies to England

1. Introduction

ESFA undertook a consultation on subcontracting reforms in February 2020. As part of that consultation, one of the proposals for reforming the future arrangements for subcontracting of ESFA funded post-16 education and training was that ESFA would develop an externally assured subcontracting standard to replace the audit certification process which is currently/was previously required.

The results of the consultation identified that this proposal would be welcomed, and the intention therefore is that this standard will be introduced from funding year 2022 to 2023 and will effectively act as a license to subcontract. The standard is separate from, and different in purpose, to Ofsted’s Education Inspection Framework. It does not replace or overlap with Ofsted’s remit. The subcontracting standard is about oversight and management of public funds and ensuring that these are used to best effect, to maximise the value of those funds to benefit the learner. This new framework will ensure that there is a clear and consistent approach for the (contract) management of subcontractors by lead providers and that there are robust assurance review arrangements.

It will assist in mitigating the risk of:

  • inadequate (contract) management of subcontractors

  • non-compliance with ESFA funding rules by subcontractors; and

  • fraudulent and incorrect funding claims

This document sets out the requirements for all providers who subcontract £100,000 or more of their delivery, across all ESFA funding streams.  

2. Definitions

Lead provider

A lead provider is a college, training organisation or employer that has a direct contractual relationship with ESFA.

Subcontractor

A subcontractor is a separate legal entity or an individual that has an agreement (called a subcontract) with you to deliver any element of the education and training we fund.

A separate legal entity includes companies in your group, other associated companies, and sole traders. An individual could include a person who is a sole trader, self-employed, or employed by an agency unless those individuals are working under your direct management and control in the same way as your own employees.

Each lead provider and subcontractor must have a valid UK Provider Registration Number (UKPRN).

External auditor

An external auditor is a professionally qualified person from an organisation external to the provider that is able to provide an independent report on their subcontracting systems and controls. The person should be registered with an appropriate professional body.

For the sake of clarity, the external auditor cannot be an employee, director, trustee, shareholder or any other similar party with a vested interest in the provider, irrespective of whether their normal role is to carry out their audit work. The external auditor does not necessarily have to be a provider’s existing external auditor. 

3. Transitional arrangements

We recognise that providers will need time to ensure that the elements of the standard are achievable, and we set out a timetable in our published further information document in March 2021.

The timetable, in table 1, sets out our clear expectation that providers will be required to continue with the current assurance arrangements in the first year the standard is published. We expect that providers will take this first year to ensure they are aligning their subcontracting delivery to the standard, where it does not already, and ensuring that they have appropriate evidence in place to ensure that they can demonstrate compliance with the standard.

Table 1: Timeline to transition to the subcontracting standard:

Funding Year Current Requirement – External Audit Report Externally Assured Standard
2019 to 2020 ESFA require a copy of the report by 30/09/2020 if: - Subcontract £100k or more of apprenticeship funding, - And/or, - Subcontracts £100k or more of AEB/ESF funding. ESFA reserve the right to request copies of the report and associated action plan. Currently chasing outstanding reports. In development, utilising intelligence from the external audit report contents and working with internal/ external stakeholders.
2020 to 2021 Requirement for AEB, ESF and Apprenticeship provision to send certificate, report, and associated action plan to the agency by 30 September 2021. Guidance and funding rules updated to reflect that it will now be £100k or more across all 3 funding streams. Updated certificate to ensure ESFA has access to the correct information. It is our intent to publish an initial draft by 31 July 2021
2021 to 2022 We will include this requirement in the 16 to 19 funding rules and the requirement will then become if you subcontract out £100k or more of apprenticeship, AEB, ESF or 16 to 19 funding (rather than looking at individual funding stream level) you must get an external audit report and certificate. These must be sent to the agency by 31 July 2022. The standard will be introduced, and we expect providers to start working toward this. It will not be subject to any external validation in this transitional year.
2022 to 2023 This requirement will be replaced by the externally assessed standard. First year of being externally validated prior to ESFA accreditation of standard.

ESFA understands that a one-size fits all approach is inappropriate in relation to the application of the standard. The standard and auditor guidance are designed to be reasonable and proportionate.

4. Pre-award activities

Before you enter a subcontract arrangement you must be able to demonstrate:

1: There is a clear educational rationale/business case for subcontracting which aligns to the provider’s corporate and operational strategies. We would expect the business case to set out the policy, business and operational objectives including consultation with stakeholders and undertaking research to determine the education rationale. This rationale must consider the expectation ESFA has for providers to reduce their subcontracted provision. We would also expect the business case to be presented and approved at executive/board level for sign off.

2: The education rationale meets one or more of the following aims:

  • enhances the opportunities available for learners

  • fills gaps in niche or expert provision or provides better access to training facilities

  • supports better geographical access for learners

  • offers an entry point for disadvantaged groups; or

  • gives consideration of the impact on individuals with shared protected characteristics, where there might otherwise be gaps

3: The drafting process for the specification and requirements. This drafting process is concerned with breaking down the overall scope documented as part of the educational rational /business strategy into more detail and then, progressively, and iteratively, refining into schedules of detailed requirements, ensuring that the objectives for subcontracting will be met and the subcontractor will meet the requirements of this standard along with the requirements laid out in the funding rules.

4: There is a procurement strategy that would cover the pre-qualification, qualification, and tendering procedures. As part of the strategy, whether this is new or an existing process, the provider would need to decide what pre-qualification is required in respect of the criteria resulting in a Pre-Qualification Questionnaire (PQQ) being produced for those expressing an interest.

5: That the PQQ is sufficient to collect, but not limited to, the following information: organisation, including ultimate parent details including identity, ownership and background, principal activities (past and present), organisational chart, contractor/sub-contracting approach, professional/commercial affiliations, legal, financial, capability, quality management systems, Ofsted reports and experience and track record.

6: The procurement strategy/process ensures that a robust assessment process for selecting subcontractors has been established that would review the subcontractor’s completed PQQ as well as their capability to control quality, delivery, quantity, price and all the other factors contained in the subcontract. Following a successful appraisal, the subcontractor is placed on an approved list of contractors.

7: The procurement process includes the drafting of the ITT documents. Attention should be paid by the provider to ensure that the contract document sets out clearly, comprehensively, and unambiguously, the obligations of the parties to the agreement.

8: The evaluation process includes not only the analysis of the potential subcontractor’s response to the main subject matter of the requirements set out in the ITT, such as price, delivery, quality, methodology, for example but also, most importantly, the quality of the bidder’s offer. There should be a clear rationale for how the tenders are evaluated and scored.

9: That following tender evaluation and, where appropriate, negotiation, the provider will satisfy themselves that an offer has been made which meets its requirements in all respects, including budgetary and capability, and consider that it is able to accept an offer and award the contract to the tenderer who meets the contract specification. It may then move directly to the award stage or make a recommendation to higher authority levels within the organisation for acceptance is aligned to the provider’s strategic and operational objectives.

10: That there is a contract management plan which determines how the contract will work once it has been awarded. It is vital that a contract management plan is drawn up in advance of contract award. This should set out how the obligations of all the parties should be carried out effectively and efficiently.

11: That the proposed subcontract will meet the agreed educational needs, that it is achievable and affordable, and it addresses the desired outcome(s) of the subcontract, critical success factors, the possible alternatives, including existing contracts, the risks including the extent and where they may fall, identification of any contingent needs and ramifications of proceeding and timescales.

12: Where appropriate you have sought approval from ESFA for any agreed subcontracting terms in relation to distance learning and whole programme subcontracting for 16 to 19 and there is evidence of this.

13: That management fees have been determined for the full range of funding retained and charges that they wish to apply, and these have been agreed at executive level and published on the website. These should only exceed 20% in exceptional circumstances, and where they do, ESFA reserve the right to challenge.

5. Contract award and management

In preparing for contract management and providing oversight the provider must be able to demonstrate:

1: That all awarded contracts are managed by staff within the organisation who have clearly defined role(s) that have been agreed as part of the overall considerations in producing the business case.

2: The defined roles ensure that contract ownership is clear, with the budget holder, senior responsible owner (SRO), and contract manager clearly defined (where appropriate).

3: There are well defined policies and processes and a clear contract management plan, with a focus on outputs and a ‘whole life’ approach to performance. For example. this must include, where appropriate, evidence of how the provider will:

a. manage and oversee 16 to 19 distance and whole programme provision through the life of each learner’s programme of study.

b. define how whole programme subcontracting for AEB will be agreed and managed.

c. ensure apprenticeship provision is not delivered solely by a subcontractor, as per the apprenticeship funding rules with specific regard to substance, leading the relationship, and the subcontracted delivery complimenting the main provider’s programme.

4: How these policies, including the rationale, are reviewed by the provider ahead of each Funding Year. Furthermore, the provider should demonstrate that the policies and rationale have been appropriately authorised through the organisation’s governance structure. Once reviewed, updated policies must be published by 31 October in the relevant funding year.

5: Where appropriate, overall ownership of contract management across the organisation is clear, with a ‘contract management senior responsible owner’ with responsibility for driving organisation-wide contract management performance.

6: Contract management processes are aligned with, among others, wider organisational governance processes, operational boards, and risk structures.

7: Contract management issues and performance are reported through the governance structure with senior level engagement.

8: Regular assessment and evaluation must take place to ensure that the cost of contract management activities is justified and proportionate to the benefits obtained.

9: Knowledge management is embedded, capturing key data and lessons from contract management process and experience both within the organisation and more widely.

10: Professional contract management guidance is developed, or identified from external sources, and made available to contract managers.

11: An appropriate assessment to ensure extremist organisations are not funded through the subcontracting Department of Education funding.

6. People

In ensuring the right people are in place to carry out the contract management activities, the provider must demonstrate:

1: That either your business continuity / contingency plan incorporates the role of the contract manager(s)/ those with contract management responsibility (ideally through involvement during the tendering/contract award processes) or you ensure continuity by ensuring there are appropriate handover / information sharing procedures in place.

2: The contract manager(s) have a detailed knowledge of the contract and other relevant issues, such as service level agreements, requirements in line with ESFA contract and funding rules and current subcontractor performance.

3: The contract manager(s) have the appropriate skills (both specific contract management skills and more general commercial awareness and expertise), with access to relevant training and development. Experienced contract managers are utilised on key contracts.

4: Contract manager(s) have accurate job descriptions, roles are positioned at an appropriate level and salary, and there is a career path for contract management staff.

5: Contract manager(s) have clear objectives and reporting lines, and their performance is managed through reviews and appraisals.

6: The contract manager(s) have appropriate delegated authority to manage the contract effectively.  

7. Administration

In managing the contract(s) and the timetable for making key decisions, the provider must demonstrate that:

1: Signed contracts are stored and logged and are easily accessible when required; for complex contracts, a summary and/or contract operations guide should be produced.

2: Key contractual information is recorded appropriately to allow, for example; search capability; documentation of up-to-date contract information; and key dates.

3: There are mechanisms in place for identifying key contract ‘trigger points’, such as notice periods.

4: There is schedule of regular as well as ad hoc reporting of contract management information and retention of appropriate documentation such as, minutes of contract meetings, reviews of teaching and learning etc.

5: There are appropriate processes and procedures in place to ensure that contracts are closed and/or terminated efficiently.

6: The provider has considered the cost of contract management activities to the subcontractor, and the cost is proportionate to the contract size and risk.  

8. Managing relationships

The provider must have appropriate procedures in place to manage their relationships with subcontractors and be able to demonstrate that:

1: Proactive conversations and/or independent checks are undertaken in relation the subcontractor at least on an annual basis which cover and document as a minimum, the subcontractor(s):

a. current ownership and person of significant control. Notification must be made to ESFA where this has changed from a previous year. b. current/ latest financial health position. c. a review of learning activity delivered, including compliance with the relevant funding rules for each programme . d. the subcontractor(s) business continuity / contingency plan remains relevant or has been updated appropriately.

2: Their contract manager understands their own role and has clear visibility of the roles and responsibilities of staff on the subcontractor side.

3: The respective responsibilities of the contract manager and the subcontractor are clear, and potentially defined in a ‘joint statement of intent’ or similar document.

4: Continuity of key subcontractor staff is desirable (ideally through involvement during the sales process); where this cannot be achieved, there must be a handover from the staff responsible for the tendering process.

5: Both regular structured and informal communication routes between the contract manager and subcontractor are open and used; customer and subcontractor staff are co-located where appropriate.

6: Users are given clear expectations and an understanding of the contract and the services/ performance to be delivered (for example, through newsletters or briefings).

7: Communications between the contract manager, subcontractor, and other stakeholders (users of the contract and others such as technical experts) are effective; and stakeholders are involved in contract management processes where appropriate.

8: Problem resolution processes are well defined and used and are designed to ensure minor problems do not escalate and cause relationship issues; a ‘blame culture’ is avoided (for example, using a ‘relationships charter’ or similar document). 

9. Managing performance

ESFA’s expectation is that a prime will have processes and procedures in place to effectively manage subcontracted provision, you will be required to demonstrate that as a minimum:

1: Service management is well structured; baselines are understood by both parties, and subcontractors understand the service they are required to deliver. The contract manager ensures that the lead provider furnishes the subcontractor with the information and contacts needed to deliver the service.

2: A performance management framework is in place when the contract is signed. The framework is comprehensive, objective and provides incentives for the subcontractor to meet or exceed agreed performance standards.

3: Service levels agreements are in place, and are linked to business needs, understood by the subcontractor, and monitored by the contract manager and/or end users.

4: Subcontractor performance is assessed using clear, objective, and meaningful metrics, linked where appropriate to ESFA’s funding rules and/or guidance.

5: Clear processes are in place to handle operational problem resolution and resolve issues as quickly as possible.

6: Where appropriate, user compliance with the contract is monitored and managed to ensure maximum operational effectiveness and value for money.

7: Regular and routine feedback is given to subcontractors on their performance.

8: There are clear contact points for service users both within the subcontractor organisation and with the contract manager. Users understand what the contract is intended to deliver and are involved in the assessment of subcontractor performance where relevant. Users understand escalation routes where issues arise.

9: Changes in user requirements are captured and considered as part of formal change and contract management processes.

10: There are formal performance reviews with subcontractors, with documented improvement plans agreed where necessary, covering both operational issues and adherence to key contractual requirements, for example, on data security.  

10. Payments and incentives

ESFA’s expectation is that a lead provider will have sufficient processes and procedures in place to effectively monitor the financial payments in relation to their subcontracted provision, you will be required to demonstrate that as a minimum:

1: Payment mechanisms are documented and are clear and well understood by all parties (including incentives, penalties, and non-standard charges).

2: Payment processes are well defined and efficient; appropriate checks and authorisation processes are in place for paying invoices.

3: The costs of the services delivered, and contract management costs are mapped against budgets and allocated appropriately.

4: Payment changes after the contract is let, for example from contract variations or benchmarking/ market testing, are made using contractual provisions and demonstrated to provide value for money.

5: Payments are not made in advance of evidence to demonstrate learning activity has been undertaken.  

11. Risk management

In order to provide assurance to ESFA that you have effective risk management procedures in place to effectively manage the public money which is paid to subcontractors. As a minimum you will be expected to demonstrate:

1: Contractual/subcontractor risk management is in place with clear responsibilities and processes, identification of who is best placed to manage risk, and subcontractor involvement where appropriate.

2: Risks are formally identified and monitored regularly, with mitigating actions developed and implemented where possible, and ‘obsolete’ risks removed from consideration where appropriate.

3: Escalation and reporting routes are in place for risk governance.

4: Contingency plans are developed to handle subcontractor failure (temporary or long-term failure/default); exit strategies are developed and updated through the life of the contract.

5: Contractual terms around termination are understood and monitored by the contract manager.

6: Contractual terms around warranties, indemnities and insurance are understood and monitored by the contract manager.

7: Contractual terms around security and confidentiality are understood and monitored by the contract manager, particularly issues relating to the security/confidentiality of personal data.

8: Dispute resolution processes are in place, including agreed adjudication procedures, mediation, and arbitration.

9: The contract manager monitors the subcontractor’s financial health and business performance (including using credit rating agencies).

10: The contract manager monitors the subcontractor’s compliance with contractual ‘non-performance’ issues (for example, on tax and sustainability targets).  

12. Contract development and/or termination

In order to ensure that changes to the contract or termination are handled appropriately and efficiently the lead provider must:

1: Undertake analysis of their subcontracted activity each year, to inform the progress made in their plans for a reduction across the 3-year period.

2: Regularly review the subcontract (with a view to updating where necessary) to ensure it meets evolving business and educational needs.

3: Ensure processes are in place that clearly lay out the governance of contractual change – who needs to approve what and how it will happen – with a focus on effective and prompt change implementation.

4: Ensure there are clear processes for the management of minor changes and contract variations, with a focus on the cost/effort being proportionate to the importance and value of the change.

5: Ensure there are more rigorous processes to handle major contractual changes, including clear approval mechanisms and accountabilities, and controls to demonstrate that changes offer value for money.

6: Where appropriate, undertake value for money testing of existing services through benchmarking or other processes.

7: Ensure there are processes to cover the introduction of new services under the contract, including market testing where necessary.

8: Have dispute handling processes in place to address any change related issues.

9: Have processes to account for various types of contractual changes. Both parties have a clear understanding of the arrangements for any extension of the contract (both scope and time) and related issues.

10: Ensure processes are in place to handle commercial (financial) changes to the contract in a fair and structured manner.

11: Manage price changes fairly and effectively with the use of mechanisms such as benchmarking, competitive tendering (for example, for major additional works), or other techniques such as open book pricing as appropriate, to demonstrate value for money.

12: Demonstrate their rationalisation of specifications and demand management are considered as options to achieve better value for money.  

13. Provider development

Improving provider performance and capability is key to developing the relationship with subcontractors. Lead providers must demonstrate they have:

1: Processes in place that clearly set out how provider development activities will be planned, managed, and governed.

2: Clear processes for benefits measurement and capture are in place to ensure that provider development is focused on continuous improvement and achieving value for the lead provider.

3: The lead provider understands what motivates and drives the subcontractor and how provider development fits with the provider’s goals.

4: Provider operational performance improvement activities (for example, ‘Lean’ and ‘6-sigma’), with potential input or assistance provided by the lead provider.

5: Joint working or shared activities between the 2 parties for the benefit of both the provider and subcontractor (for example, process improvement, shared training, task forces or joint project teams).

6: Provider improvement activities relating to wider government initiatives, with input or assistance provided by the lead provider (for example, on sustainability, disability employment issues, use of SMEs (Small and Medium Sized Enterprises) and BMEs (Black Minority Ethnic suppliers)).

7: Shared risk reduction programmes or activities.

8: Shared management activities (for example, provider boards) to drive performance improvement. 

14. Annex A – Reporting requirements

Separate guidance for auditors will be issued in 2021 and appended to future versions of this guidance.

Each reporting auditor can use their own stylised report, however, it must include the following as a minimum:

  • name and contact details of the organisation and auditor undertaking the audit
  • name of the provider being audited and the provider audit contact
  • funding year applicable to the review
  • date the review was undertaken and concluded
  • report status [Draft] [Final]
  • table of contents
  • executive summary / Summary of findings linked to the standard in a tabular format:
    • subcontracting standard requirements
    • compliance status
    • number of recommendations raised; and
    • summary of findings
  • agreed objectives and scope of work
  • approach
  • detailed findings and recommendations linked to each point of the standard in a tabular format with the following headings:
    • area of standard
    • findings / observations / issues
    • risk / implications
    • recommendations
    • compliance rating
    • response from the provider
    • responsible officer & target date

15. Annex B – Example report

[Name of audit organisation]

[Name and contact details of auditor]

[Draft] or [Final] Report of the assessment of ESFA Subcontracting standard for [Provider ABC] for funding year [2021/22]

[Insert Date]

[Contents]

Example: Executive summary

During the course of our review, we have identified the following observations which are recorded in detail at [cross reference to detailed findings] and summarised in the table below:

Subcontracting Standard Requirements Compliance status No of Recs raised Summary of findings
Pre-Award Activities Fully Compliant 0 The review identified that the provider was fully compliant with all requirements of the standard.
Contract Award & Management Partially Compliant 2 We identified 2 areas for improvement. Recommendations have been made in respect of [relevant detail]
People No compliance 6 The provider were unable to supply evidence to demonstrate compliance with the standard
Administration Fully Compliant 0 The review identified that the provider was fully compliant with all requirements of the standard.
Managing Relationships Fully Compliant 0 The review identified that the provider was fully compliant with all requirements of the standard.
Managing Performance Fully Compliant 0 The review identified that the provider was fully compliant with all requirements of the standard.
Payments and Incentives Fully Compliant 0 The review identified that the provider was fully compliant with all requirements of the standard.
Risk Management Fully Compliant 0 The review identified that the provider was fully compliant with all requirements of the standard.
Contract Development and/or termination Fully Compliant 0 The review identified that the provider was fully compliant with all requirements of the standard.
Provider Development Fully Compliant 0 The review identified that the provider was fully compliant with all requirements of the standard.

Example: Introduction

ESFA undertook a consultation on subcontracting reforms in February 2020. As part of that consultation, one of the proposals for reforming the future arrangements for subcontracting of ESFA funded post-16 education and training was that ESFA would develop an externally assured subcontracting standard to replace the audit certification process which was previously required.

The subcontracting standard was introduced to the sector to drive improvement in the quality of contract management and oversight by lead providers. This standard will ensure that there is a clear and consistent approach for the (contract) management of subcontractors by lead providers and that there are robust assurance review arrangements. It will help to mitigate the risk of:

  • inadequate (contract) management of subcontractors
  • non-compliance with ESFA funding rules by subcontractors; and
  • fraudulent and incorrect funding claims

This report is a review of [Provider ABC’s] compliance against the subcontracting standard. It will assist in ESFA’s in its decision making as to whether the provider has the systems and controls in place to manage their subcontractors in line with the standard and provide assurance that subcontracted provision is appropriately managed.

Example: Objectives and scope

ESFA has designed the approach and methodology for this review. This is to ensure that the review sufficiently covers all requirements and that there is consistency in approach and quality.

It has been designed to gain assurance that providers are managing their subcontracted provision to a high standard that ensures that public funds are used appropriately and for the purpose for which they were intended.

Our review covered all requirements of the standard as detailed in the executive summary and the compliance with the subcontracting funding rules which cover the following funding streams:

  • carry-in apprenticeships
  • adult education budget
  • apprenticeships (for starts from 1 May 2017) *16 to 19 study programmes

Example: Approach

Outline of the approach undertaken, and procedures performed to identify the detailed findings and subsequent recommendations. Detail the type and levels of assurance / audit activity and align to international auditing standards where appropriate.

Example: Detailed finding and recommendations

Our detailed observations and recommendations are recorded in the table below:

Area of standard Finding / observation / issue Risk/ Implication Recommendation Compliance Rating Response from the provider Responsible Officer & Target Date
2.1 CM [Nature of finding] Partially compliant with the standard The provider should retain evidence to support…   Disagreed, supplementary evidence submitted to ESFA alongside report. Jane Smith 01 April 2023
2.1 CM [Nature of finding] Partially compliant with the standard     Agreed Jules Smith 01 April 2023
3.1 People [Nature of finding] Not compliant with standard     Agreed Jaden Smith 01 April 2023
3.2 People [Nature of finding] Not compliant with standard     Agreed Jack Smith 01 April 2023
3.3 People [Nature of finding] Not compliant with standard     Agreed Jorgy Smith 01 April 2023
3.4 People [Nature of finding] Not compliant with standard     Agreed Joey Smith 01 April 2023
3.5 People [Nature of finding] Not compliant with standard     Agreed Jake Smith 01 April 2023
3.6 People [Nature of finding] Not compliant with standard     Agreed Jill Smith 01 April 2023